Make or Buy Martens, Inc., manufactures a variety of electronic products. It specializes in com- mercial and residential products with moderate to large electric motors such as pumps and fans. Martens is now looking closely at its production of attic fans, which included 10,000 units in the prior year and had the following costs. These costs included $100,000 of allocated fixed manufac- turing overhead. Martens has capacity to manufacture 15,000 attic fans per year.
Martens believes demand in the coming year will be 20,000 attic fans. The company has looked into the possibility of purchasing the attic fans from another manufacturer to help it meet this demand. Harris Products, a steady supplier of quality products, would be able to provide up to 9,000 attic fans per year at a price of $46 per fan delivered to Martens's facility.
For each unit of product that Martens sells, regardless of whether the product has been purchased from Harris or is manufactured by Martens, there is an additional selling and administrative cost of $20, which includes an allocated $6 fixed overhead cost per unit. The following is based on the production of 10,000 units in the prior year.
Selling price per unit $72.00
Costs per unit
Electric motor $ 6.00
Other parts 8.00
Direct labor ($15/hr.) 15.00
Manufacturing overhead 15.00
Selling and administrative cost 20.00 64.00
Profit per unit $ 8.00
Required
1. Assuming Martens plans to meet the expected demand for 20,000 attic fans, how many should it manufac- ture and how many should it purchase from Harris Products? Explain your reasoning with calculations.
2. Independent of Part 1 above, assume that Beth Johnson, Martens's product manager, has suggested that the company could make better use of its fan department capacity by manufacturing marine pumps instead of fans. Johnson believes that Martens could expect to use the production capacity to produce and sell 25,000 pumps annually at a price of $60 per pump. Johnson's estimate of the costs to manufacture the pumps is presented below. If Johnson's suggestion is not accepted, Martens would sell 20,000 attic fans instead. Should Martens manufacture pumps or attic fans? Information on the sales price and costs for the marine pumps follows.
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Selling price per pump
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$60.00
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Costs per unit
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Electric motor
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$ 5.50
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Other parts
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7.00
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Direct labor ($15/hr.)
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7.50
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Manufacturing overhead
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9.00
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Selling and administrative cost
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20.00
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49.00
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Profit per pump
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$11.00
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3. What are some of the long-term considerations in Martens's decisions in Parts 1 and 2 above?